25-04-2014, 11:30 AM
Strategic Cost Management
Strategic Cost .ppt (Size: 292 KB / Downloads: 15)
Objectives
Understand relationship between sales and product costs
Identify processes for assessing supplier pricing strategies
Present tools for analyzing supplier’s costs
Provide overview of contract management strategies
Problems with Traditional Cost Accounting
“Standard” product costs
No recognition of tradeoffs
Product cost structures
Allocation of overhead fixed
Budgeting and control
Labor efficiencies / machine utilization
Approaches
Market-Based Pricing
The price the buyer pays is not linked to the supplier's cost structure
Cost-Based Pricing
The price the buyer pays is directly linked to the supplier's cost structure
Hybrid
Some elements of cost may be known by the buyer
Cost-based Pricing –
Non-collaborative
Market-testing - Initial contact through bid and on-going negotiations
Target pricing - established ceiling cost to achieve a competitive position in the market for the finished product
Supplier uses target price as a basis for accepting the order
Supplier Pricing Program
Pricing Objectives
Long-term versus Short-term
Price Leader versus Follower
Establish Entry Barriers
Pricing Strategy
Cost based pricing (cost + fixed markup)
Market based pricing (penetration, skimming, floor pricing)
Ratio of Price Change to Market Index Change
Most appropriate for market-based products where pricing is function of supply and demand
Price change measure for a purchase family which compares difference in an index and compares to price paid for a purchase family
Useful to ensure an external benchmarking perspective for product / service family category
Critical issue: “target” for how much “better than market” in increasing and decreasing market
World Class Excellence - Case
Manufacturer measures price performance against predetermined agreement, versus a PPI or other index, or simply increases/decreases by percentage
Problems: Difficult to group suppliers when industries, markets and our expectations vary. Some data are still too subjective.
Performance: Avg. performance of .5% to 3% better than inflation over a 15 year rolling average. Actual average performance is approximately .75% better than inflation annually for 15 years ($15 Million to over $50 Million in competitive pricing advantage.
Summary
A first step to cost management is understanding the total volume of sales and relationship to suppliers’ costs
Suppliers use different pricing strategies which may not have any relationship to actual costs
A price index is a good way to understand pricing trends
Different approaches to reducing costs are possible